Annual Report and Accounts 2022 to 2023
e) Finance leases
The definition of a lease has been updated under the International Financial Reporting Standards (IFRS) 16, and there is more emphasis on being able to control of the use of asset identified in a contract. There are new requirements for variable lease payments such as Retail Price Index (RPI) and Consumer Price Index (CPI) uplifts, and there is an accounting policy choice allowable to separate non-lease components.
At inception of a contract, the Gambling Commission assesses whether a contract is, or contains, a lease. A contract is, or contains a lease if the contract conveys the right to control the use of an identified asset for a period of time. This includes assets for which there is no consideration. To assess whether a contract conveys the right to control the use of an identified asset, the Commission assesses whether:
- the contract involves the use of an identified asset
- the Commission has the right to obtain substantially all of the economic benefit from the use of the asset throughout the period of use
- the Commission has the right to direct the use of the asset.
The policy is applied to contracts entered into, or changed, on or after 1 April 2019.
At inception or on reassessment of a contract that contains a lease component, the Commission allocates the consideration in the contract to each lease component on the basis of the relative standalone prices.
The Commission assesses whether it is reasonably certain to exercise break options or extension options at the lease commencement date. The Commission reassesses this if there are significant events or changes in circumstances that were anticipated.
As a lessee
The Commission recognises a finance lease and lease liability at the commencement date. The finance lease is initially measured at cost, which comprises the initial amount of the lease liability adjusted for initial direct costs, prepayments or incentives, and costs related to restoration at the end of a lease.
The finance leases are subsequently measured at either fair value or current value in existing use in line with property, plant and equipment assets. The cost measurement model in IFRS 16 is used as an appropriate proxy for current value in existing use or fair value for the majority of leases (consistent with the principles for subsequent measurement of property, plant and equipment) except for those which meet one of the following:
- a longer-term lease that has no provisions to update lease payments for market conditions or if there is a significant period of time between those updates
- the fair value or current value in existing use of the underlying asset is likely to fluctuate significantly due to changes in market prices.
The finance lease is depreciated using the straight line method from the commencement date to the earlier of the end of the useful life of the right of use asset or the end of the lease term. The estimated useful lives of the finance leases are determined on the same basis of those of property plant and equipment assets.
The Commission applies International Accounting Standards (IAS) 36 Impairment of Assets to determine whether the finance lease is impaired and to account for any impairment loss identified.
The lease liability is initially measured at the present value of the lease payments that are not paid at the commencement date, discounted using the interest rate implicit in the lease, or if that cannot be readily determined, the rate provided by His Majesty's (HM) Treasury.
The lease payment is measured at amortised cost using the effective interest method. It is remeasured when there is a change in future lease payments arising from a change in the index or rate, if there is a change in the Commission’s estimates of the amount expected to be payable under a residual value guarantee, or if the Commission changes its assessment of whether it will exercise a purchase, extension or termination option.
Lease payments included in the measurement of the lease liability comprise the following:
- fixed payments, including in-substance fixed payments
- variable lease payments that depend on an index or a rate, initially measured using the index rate as at the commencement date
- amounts expected to be payable under a residual value guarantee
- the exercise price under a purchase option that the Commission is reasonably certain to exercise, lease payments in an optional renewal period if the Commission is reasonably certain to exercise an extension option, and penalties for early termination of a lease unless the Commission is reasonably certain not to terminate early.
When the lease liability is remeasured a corresponding adjustment is made to the finance lease or recorded in the the Statement of Comprehensive Net Expenditure (SoCNE) if the carrying amount of the finance lease is zero.
The Commission presents finance leases that do not meet the definition of investment properties per IAS 40 as finance leases on the Statement of Financial Position. The lease liabilities are included within lease liabilities within current and non-current liabilities on the Statement of Financial Position.
Last updated: 18 October 2023
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